Payroll tax obligations – Have you got it covered?

January 16, 2024

If you employ one or more people for paid work, it’s essential that you have a properly managed payroll.

Representing a significant cost to businesses and of high importance to employees, labour costs must be managed correctly – which includes paying the right amount of tax on wages.

Payroll tax obligations do not only include deductions from an employee’s salary – they also include the employer’s tax responsibilities.

Efficiently handling these obligations is crucial for maintaining compliance with tax laws and ensuring the financial health of your business.

What do I need to pay?

Payroll taxes typically consist of a number of payments which a business must make to the Government directly, some of which will be deducted from an employee’s earnings. Others will be deducted from profits directly.

These may include:

  • Income Tax – Taken from an employee’s salary according to their individual tax code, paid directly to HM Revenue & Customs (HMRC).
  • National Insurance Contributions (NICs) – Paid by both an employer and employee depending on earnings and NIC categories.
  • Apprenticeship Levy – Payable by companies with an annual wage bill of £3 million or more, paid at a rate of 0.5 per cent of your wage bill.
  • Statutory payments – Although some costs are paid by the Government, you may have to put certain payments such as maternity or adoption pay through your payroll.

You should also be aware of any changes in rates of pay internally and at national level.

For example, the rise of the National Living Wage to £11.44 per hour, and its extension to 21 and 22-year-olds for the first time, will raise earnings and tax obligations for many workers.

In turn, employers will need to reflect this change in their payroll and calculate new tax and NIC liabilities – which has also recently been reduced.

The complexity of payroll taxes

One of the major challenges faced by SMEs with employees is the complexity of payroll and associated tax obligations.  

Tax regulations can be intricate and are often subject to change, which means staying updated is crucial.

Each employee’s situation might be different – varying tax codes, different entitlements or deductions – and each of these variables can change the amount of tax that needs to be withheld and paid.

Additionally, errors in calculating payroll taxes can be costly, particularly when it comes down to changes in pay or tax regulations and rates.

They can lead to penalties from HMRC as well as the costs of rectifying the mistake.

There’s also the risk of underpaying or overpaying employees, which can affect morale and trust within your team.

How to manage payroll taxes

With the right approach, you can make managing your payroll while meeting your tax obligations straightforward and efficient. Here’s how:

  • Accurate record keeping – Keeping detailed records of all employees’ salaries, bonuses, deductions, and personal information is essential as the basis of accurate tax calculation and reporting.
  • Staying informed and compliant – Missing a regulatory update can lead to non-compliance, inadvertently placing your business at risk of penalties, although your accountant can help you with this.
  • Leveraging technology – Accounting technology can help to calculate individual tax obligations based on tax codes, with many also offering integration with accounting software, further streamlining financial management.
  • Seeking professional advice – Get help calculating tax deductions and liabilities for individual employees and filing your monthly payroll – as well as applying any applicable tax reliefs.

Payroll becoming taxing? We can help.

For small businesses and those without an in-house finance team, seeking support with payroll is essential to avoid non-compliance with tax obligations.

To optimise your payroll tax deductions, speak to our experts to find out how we can make staff costs, payslips, incentive schemes and bonuses a breeze.

Get in touch with us today to take your payroll up a notch.

Further reading

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